Glossary
Short Selling
A trade run in reverse: shares are borrowed and sold first, then bought back later and returned to the lender.
An ordinary position is bought and then sold. A short position is sold and then bought. The shares are borrowed through the broker, sold into the market at today's price, and at some point bought back and handed to the lender, with the difference between the two prices settling as a gain or a loss.
The risk is not the mirror image of the ordinary case. A share bought at $50 can fall to zero, so $50 is the most that can be lost on it. A share sold short at $50 can rise with no ceiling, and the borrower still owes a share back at whatever it then costs, which is why the course's risk lesson groups short selling with the cases where a loss has no natural limit.
Borrowing is not free either. The lender charges a fee that moves with how scarce the shares are, any dividend paid while the position is open is owed to the lender, and the loan can be recalled. Short interest is the running total of shares sitting in that state across a whole company, and it is reported on a lag rather than live.
Learn this properly
Lesson 5: Risk, in the Language You Already UseWhat you can actually lose, why volatility and loss are not the same word, and diversification without the lecture.
Related terms
- Short InterestThe number of a company's shares currently sold short, usually shown as a percentage of shares available to trade.
- FloatThe number of a company's shares actually available to trade, once restricted and closely held stock is excluded.
- VolatilityHow much a price moves around over a period, in either direction, measured as the size of the swings rather than the destination.
- Buying on MarginBorrowing from a broker to hold more shares than the cash in the account would pay for, with the account itself as collateral.
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